What is an Alternative Cost?

Definition: An alternative cost is a potential benefit that could have been received but wasn’t because another course of action was taken.

What Does Alternative Cost Mean?

What is the definition of Alternative Cost? Often opportunity costs are considered the lost benefits associated with the choices not made. An individual usually takes these into account when making decisions regarding the use of their time, money, and the utility an action or good provides. The option chosen reflects a greater value to the decision-maker which can be attributed to many reasons and circumstances.

Let’s look at an example.

Example

Jane is graduating from high school and she wants to weigh her decisions between getting a job or focusing on a career in college. There are expenses and costs associated with each decision. For option 1, Jane would get a job which would require her to lease a car at $450 a month, but she could live at home, so her rent would be $0, but she would be responsible for utility payments which would be around $300. Per month she earned $3,000 at her job. For option 2, Jane would leave home and go to college, her parents would pay for the apartment but she didn’t need a car because she would catch the shuttle to school, each year she incurred $4,000 in debt and she will be attending for 4 years but when she graduates she predicts earning $5,500 a month.

To find out her alternative cost, she must pick a decision. If Jane picks option 1, she is forgoing $2,500 a month in earnings and spending $450 on a car and $300 in utilities. If she picks option 2, she is missing 4 years’ worth of $3,000 per month and instead is incurring $4,000 a year in student debt.

Summary Definition

Define Alternative Costs: Opportunity cost means a benefit that was passed up to pursue another venture.